As decentralized money market protocols continue to grow in value locked, there have been a number of optimizations proposed for improving capital efficiency. One set of proposals from Euler Finance and Mars Protocol is to have an interest rate curve that is a proportional-integral-derivative (PID) controller. In this paper, we demonstrate attacks on proportional and proportional-integral controlled interest rate curves. The attack allows one to manipulate the interest rate curve to take a higher proportion of the earned yield than their pro-rata share of the lending pool. We conclude with an argument that PID interest rate curves can actually \emph{reduce} capital efficiency (due to attack mitigations) unless supply and demand elasticity to rate changes are sufficiently high.
Ze Chen, Ruichao Jiang, Javad Tavakoli, Yiqiang Q. Zhao
In this article we show that Theorem 2 in Lie et al. (2023) is incorrect. Since Wombat Exchange, a decentralized exchange, is built upon Lie et al. (2023) and Theorem 2 is fundamental to Wombat Finance, we show that an undesirable phenomenon, which we call the robbed withdrawal, can happen as a consequence.
Abstract This paper studies the optimal stopping problem under the large‐population framework. In particular, two classes of optimal stopping problems are formulated by taking into account the relative performance criteria . It is remarkable that the relative performance criteria, also understood by the Joneses preference , habit formation utility , or relative wealth concern in economics and finance, play an important role in explaining various decision behaviors such as price bubbles. By introducing such criteria in large‐population setting, a given agent can compare his individual stopping rule with the average behaviors of its cohort. The associated mean‐field games are formulated in order to derive the decentralized stopping rules. The related consistency conditions are characterized via some coupled equation system and the ‐Nash equilibrium properties are also verified. In addition, some inverse mean‐field optimal stopping problem is also introduced and discussed.
Sustainable cryptocurrency systems need to address the challenge of continuous inflation. Systematically maintaining stability during market turbulence can be challenging when token minting rates are predetermined and do not account for actual liquidity demand. Mindful of the critical role played by monetary policy, we propose a decentralized, truthful auction approach for tuning the currency system toward self-stabilization in volatile markets. Concretely, when severe inflation or market overheating occurs, the system enforces a contractionary monetary policy to restrain the market liquidity and avoid potential economic disasters. Should severe deflation and market stagnancy occur, more tokens will be minted than burnt to stimulate the market. Through this approach, our studies aim to provide a tool to help sustain the long-term existence of decentralized commodities.
Currently, fiat money not covered in ore (e.g. in gold or silver) plays a key role in the world. Cashless payments are also becoming more and more common. The inflationary nature of modern fiat money and the lack of a real possibility of returning to bullion money were some of the reasons for the search for market alternatives, which in 2009 led to the creation of a virtual currency called Bitcoin. From the very beginning, Bitcoin has generated a lot of controversy and interest - both on the part of its users and economists. This study is intended to discuss the issues related to the complex process of Bitcoin formation from the perspective of economic theory (Menger's achievements). It is a chapter devoted not so much to Bitcoin itself, but to Menger's theory of money, i.e. its universality in the context of Bitcoin. The study tries to answer the question whether this theory can help better understand the genesis of Bitcoin and its evolution as a medium of exchange/money.
On certain blockchains that use the proof-of-stake consensus mechanism, agents who validate transactions can set up pools that allow other agents to delegate their stake to earn higher returns. We study a version of the standard staking pool formation game in the presence of malicious agents, with an arbitrary distribution of stakes of honest agents. We establish existence and uniqueness of equilibria, how blockchain security can be maximized and how a leverage constraint impacts the functioning of the blockchain.
La necesidad de realizar transacciones económicas con un dinero que no estuviese regulado por las autoridades o gobiernos provocó la creación de las criptomonedas, que podrían ser usadas por cualquier individuo que tuviese acceso a un ordenador. En este trabajo trataremos tanto el crecimiento de su valor frente a otras monedas (en este caso el dólar, que es la moneda más utilizada) como su inestabilidad. Nos centraremos en el Bitcoin debido a que es la criptomoneda más antigua y utilizada, pero también analizaremos por encima el resto de las criptomonedas más relevantes en la actualidad.
The article analyzes the correspondence of the emergence of cryptocurrencies to two important theoretical ideas of the Austrian school of economics - the regression theorem of L. von Mises and the concept of denationalization of money by F. Hayek. The analysis shows the consistency of the new economic phenomenon with the regression theorem, since the posses-sion of bitcoin as an asset confirms the presence of some value before being used as a medi-um of exchange. Cryptocurrency competition is similar to the ideas of F. Hayek, but takes place in the conditions of maintaining the state monopoly on emission. At the same time, the commodity security of stablecoins corresponds to the commodity security of private currencies.
Bitcoin was created as a way for people to send money over the internet. The digital currency was intended to provide an alternative payment system that would operate free of central control but otherwise be used just like traditional currencies. Are bitcoins safe?
Bitcoin was created as a way for people to send money over the internet. The digital currency was intended to provide an alternative payment system that would operate free of central control but otherwise be used just like traditional currencies. Are bitcoins safe?
<p>The popularity of cryptocurrencies has grown significantly in recent years, and they have become an important asset for internet trading. One of the main drawbacks of cryptocurrencies is the high volatility and fluctuation in value. The value of cryptocurrencies can change rapidly and dramatically, making them a risky investment. Cryptocurrencies are largely unregulated, which can exacerbate their volatility. The high volatility of cryptocurrencies has also led to a speculative bubble, with many investors buying and selling cryptocurrencies based on short-term price fluctuations rather than their underlying values. Therefore, how to reduce the fluctuation risk introduced by exchanges, transform uncertain prices to deterministic value, and promote the benefits of decentralized finance are critical for the future development of cryptos and Web 3.0. </p> <p>To address the issues, this paper proposes a novel theory as Automatic Increase Market Systems (AIMS) for cryptos, which could potentially be designed to automatically adjust the value of a cryptocurrency helping to stabilize the price and increase its value over time in a deterministic manner. We build a crypto, WISH (https://wishbank.wtf), based on AIMS in order to demonstrate how the automatic increase market system would work in practice, and how it would influence the supply of the cryptocurrency in response to market demand and finally make itself to be a stable medium of exchange, ensuring that the AIMS is fair and transparent.</p>
Gianna Figà‐Talamanca, Sergio M. Focardi, Davide Mazza, Marco Patacca
In this chapter, we outline a theory of cryptocurrencies that parallels the standard theory of money. We evidence that cryptocurrencies satisfy some but not all conditions that qualify a medium of exchange as money. Specifically, the process of creation and distribution of cryptocurrencies significantly differs from that of money impacting trust and value creation. New form of cryptocurrencies, such as central bank digital currencies, are considered. We outline scenarios of future evolution of cryptocurrencies and how they might be adopted by central banks to replace cash and/or to have direct interaction with the public.
Jason Milionis, Ciamac C. Moallemi, Tim Roughgarden
In decentralized finance ("DeFi"), automated market makers (AMMs) enable traders to programmatically exchange one asset for another. Such trades are enabled by the assets deposited by liquidity providers (LPs). The goal of this paper is to characterize and interpret the optimal (i.e., profit-maximizing) strategy of a monopolist liquidity provider, as a function of that LP's beliefs about asset prices and trader behavior. We introduce a general framework for reasoning about AMMs based on a Bayesian-like belief inference framework, where LPs maintain an asset price estimate. In this model, the market maker (i.e., LP) chooses a demand curve that specifies the quantity of a risky asset to be held at each dollar price. Traders arrive sequentially and submit a price bid that can be interpreted as their estimate of the risky asset price; the AMM responds to this submitted bid with an allocation of the risky asset to the trader, a payment that the trader must pay, and a revised internal estimate for the true asset price. We define an incentive-compatible (IC) AMM as one in which a trader's optimal strategy is to submit its true estimate of the asset price, and characterize the IC AMMs as those with downward-sloping demand curves and payments defined by a formula familiar from Myerson's optimal auction theory. We generalize Myerson's virtual values, and characterize the profit-maximizing IC AMM. The optimal demand curve generally has a jump that can be interpreted as a "bid-ask spread," which we show is caused by a combination of adverse selection risk (dominant when the degree of information asymmetry is large) and monopoly pricing (dominant when asymmetry is small). This work opens up new research directions into the study of automated exchange mechanisms from the lens of optimal auction theory and iterative belief inference, using tools of theoretical computer science in a novel way.
Carlos Alberto Durigan, Fernando José Barbin Laurindo
Cryptocurrency can be understood as a digital asset transacted among participants in the crypto economy. Every cryptocurrency must have an associated Blockchain. Blockchain is a Distributed Ledger Technology (DLT) which supports cryptocurrencies, this may be considered as the most promising disruptive technology in the industry 4.0 context. Decentralized finance (DeFi) is a Blockchain-based financial infrastructure, the term generally refers to an open, permissionless, and highly interoperable protocol stack built on public smart contract platforms, such as the Ethereum Blockchain. It replicates existing financial services in a more open and transparent way. DeFi does not rely on intermediaries and centralized institutions. Instead, it is based on open protocols and decentralized applications (Dapps). Considering that there are many digital coins, stablecoins and central bank digital currencies (CBDCs), these currencies should interact among each other sometime. For this interaction the Information Technology elements play an important whole as enablers and IT strategic alignment. This paper considers the strategic alignment model proposed by Henderson and Venkatraman (1993) and Luftman (1996). This paper seeks to answer two main questions 1) What are the common IT elements in the DeFi? And 2) How the elements connect to the IT strategic alignment in DeFi? Through a Systematic Literature Review (SLR). Results point out that there are many IT elements already mentioned by literature, however there is a lack in the literature about the connection between IT elements and IT strategic alignment in a Decentralized Finance (DeFi) architectural network. After final considerations, limitations and future research agenda are presented. Keywords: IT Strategic alignment, Decentralized Finance (DeFi), Cryptocurrency, Digital Economy.
Abstract In recent years, the use of cryptocurrencies has increased. As these currencies continue to play a larger role, they eventually will be an important component of banking system activity. Moreover, in addition to the standard role of financial intermediaries to facilitate lending, intermediaries can be valuable firms that help provide safekeeping of tokens. The objective of this paper is to demonstrate these important functions in a microfounded model of monetary exchange. Furthermore, we also consider the possibility that central banks issue their own digital currencies that may affect the level of intermediation in the private banking system.
Oana Oprişan, Ana Maria Barzecu, Ana-Maria Dumitrache Șerbănescu
This paper, entitled "Cryptocurrency Trading", is a research study covering theoretical and practical notions about cryptocurrencies and their trading in financial markets.We chose this topic because cryptocurrencies and the technology behind them have revolutionised the financial sector and even now, after a period of time since their emergence and a period of time in which they have been used, cryptocurrencies raise some questions.The main objective of this paper is to show that, in the financial markets, cryptocurrencies are assets that promise a high return, i.e. a good short-term investment.The specific objectives have been highlighted by elaborating a study presenting the ways in which cryptocurrencies are traded in the financial markets and by conducting an analysis on them.The aim of this paper is to show that cryptocurrencies Bitcoin,Ethereum and ADA are the most popular and show functionality and market capitalization.
Cette thèse est un recueil de trois essais qui apportent des éléments de réponse à l’usage et à la valeur des monnaies dites cryptographiques. Chaque chapitre explore une problématique différente et utilise une méthodologie différente. Le premier chapitre étudie les caractéristiques d'utilisateurs de Bitcoin en France via le site Bitcoin.fr. Les résultats montrent que ce sont majoritairement de jeunes hommes ayant un niveau d’éducation, de revenus et de connaissances de base en finance et sur Bitcoin meilleurs que le reste de la population française. Ils sont aussi légèrement moins averses au risque. Le deuxième chapitre décrit un modèle théorique s’inscrivant dans la nouvelle économie monétariste. Il étudie le potentiel de Bitcoin en tant que monnaie complémentaire à une monnaie ayant cours légal. Nous trouvons plusieurs conditions à l’adoption de Bitcoin. Localement, il faut un niveau d’inflation ainsi qu’un taux d’acceptation de Bitcoin par les vendeurs suffisamment élevés. Au niveau international, il faut que Bitcoin soit utilisé à travers le monde afin que les frais de transactions soient répartis. En effet, ces frais deviendront inévitablement élevés du fait du nombre décroissant de nouveaux bitcoins. Le troisième chapitre met en exergue les divergences dans la littérature empirique visant à expliquer la valeur de Bitcoin. Il propose une explication : les duplications de Bitcoin constitueraient un évènement atypique qui tend à invalider les modèles de prévision. En considérant 5 périodes d’étude et 4 versions de Bitcoin, cette hypothèse se confirme empiriquement. Par ailleurs, les prix de différentes versions deviennent fortement corrélés au maximum 6 mois après leur disjonction.
“Change is the only constant,” wrote the ancient Greek philosopher Heraclitus of Ephesus. And in today's world, one of the greatest changes is the changing nature of money. As the world embraces the ease in accessibility to high-speed internet services across all spectrums, the medium of exchange is transforming from fiat currency to virtual and cryptocurrencies. The exchange of cryptocurrency heavily revolves around speculation by professionals, and institutional investors dealing with large sums of money. The global adoption of cryptocurrency has increased over the last few years and has seen an 880% increase in year-to-year transactions in the last year, reflecting the increased acceptance in cryptocurrency usage in emerging markets. India ranks second in the overall crypto-adoption index ranking, backing the increased interest of Indian investors in the cryptocurrency markets. The major focus of this paper is regarding the next phase of transition into digital and cryptocurrency and its implications on monetary policies with a specific focus on the Indian monetary system.
The objective is to study how bitcoin should be used in dollarized economies and how bitcoin is distributed to people according to their life deeds. The bitcoin contradicts all the Keynesian Economic Theory whereas bitcoin increases, its prices increase too, and this is different from the normal theory. How and why bitcoin has been built and the new universal technological techniques behind bitcoin.
Cryptocurrencies have made the headlines in mainstream news in the recent years. There are people who become rich in a matter of a few weeks as well as those who lose a fortune with Cryptocurrency. High Cryptocurrency price volatility has been witnessed as influential people and governments take turns fueling both the ups and downs. Prices rise when influential investors or persons express support for Cryptocurrencies while prices fall sharply when there are news regarding Cryptocurrency frauds and scams. Governments everywhere are still trying to find the right balance between control and leniency of Cryptocurrency adoption despite its long years of existence. In this paper, we attempt to develop a simple theoretical model to study the rational bubbles in the Cryptocurrency. In the model, two highlighted features of the Cryptocurrency are (1) an asset with fixed positive supply and (2) an asset traded internationally with infinitesimal transaction cost. We strikingly find that oscillatory bubbly equilibrium dynamic is common over a wide range of parametrization; for example, large income inequality across countries. In other words, the Cryptocurrency is highly volatile by its very own nature. Cryptocurrencies may increase welfare for agents in economies with certain parameters such as those with low relative risk aversion or high output elasticity of capital. It is a vector that can easily transfer shocks from one country to another through means of its price change alone or through means of propagated risk perception. We found an interesting insight that differentiates Cryptocurrencies from normal country restricted bubbles. When a shock happens to a Cryptocurrency anywhere, no matter how small or insignificant the economy of the source of the shock may be, a larger impact can ripple through other economies which are much bigger than the source country. This characteristic makes Cryptocurrencies either a hero or villain depending on the different parameters of the world and each economy.